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China and Australia play waiting game on investment rebound

It’s a waiting game, perhaps a long one.

The rising political tensions are weighing further on already weak inbound Chinese investment into Australia, and there is no certainty as to when investors will feel comfortable about doing a deal.

But that doesn’t mean there isn’t still an appetite for Australian assets.

The University of Sydney’s Hans Hendrischke, the co-author of an annual report with KPMG on Chinese investment, says Australia remains an attractive destination for the Middle Kingdom’s investors, but they’re nervous about the politicised business environment.

“Chinese companies are laying low and quite a few have actually pulled out,” Dr Hendrischke, professor of Chinese business and management at the university’s Chinese Studies Centre, said.

“But overall, we think there is interest and there will be more investment coming, because Australia remains a popular destination.”

However, a return to a friendlier investment and trade relationship appears even further away after the Chinese ambassador to Australia Xiao Qian’s abrasive comments to the National Press Club on Wednesday.

While noting that Australia and China are “economically highly complementary”, Mr Xiao said China reserved the right to use force to unite with Taiwan and would not comprise over the self-governing island.

The comments have been seen as hardly conducive to a quick recovery in two-way trade between Australia and China.

Chinese investment in Australia was retreating even before the COVID-19 lockdowns and border closures that restrained international trade.

It has fallen for five consecutive years since the the blitz of WA-dominated deals around mainly iron ore and gold projects dating back to the first mining investment boom and a more recent run on lithium aimed at shoring up China’s commodity feeds.

WA has been the country’s biggest beneficiary. Billions have been invested across the State in not just projects such as CITIC’s Sino Iron magnetite mine at Cape Preston, the undeveloped West Pilbara iron ore venture and Tianqi’s partly owned Greenbushes lithium mine and newly-commissioned processing plant in Kwinana, but in equity and offtake deals with the likes of lithium miner Pilbara Minerals and Mt Gibson Iron.

Even Andrew Forrest’s Fortescue Metals Group got a helping hand back in 2009 when Hunan Valin Iron and Steel Group bought a big piece of the iron ore miner, helping it through an early financial squeeze. The Chinese steel producer, an FMG customer, remains the miner’s second biggest second shareholder with a highly profitable 7.4 per cent stake worth $4.3b.

Most of the investment was done well before political tensions began rising about six years ago.

The joint University of Sydney/KPMG investment report found Chinese investment in Australia plunged another 70 per cent in 2021 to $US598 million ($842m), well off historical highs of $US16.8b in 2008 and $US11.5b at the height of the last spending spree in 2016.

The political concerns have been a factor in the slide, as were Australia’s closed borders during COVID-19. Also, China a few years back moved in to rein in outbound spending by Chinese State-owned companies, and Australia has also tightened rules on some Chinese investment.

It means that while Australia is behind only the US in the amount of investment ($US110b) attracted from China since 2007, China now trails the US, Singapore and Canada in terms of inbound investment to Australia, according to the Foreign Investment Review Board.

Argonaut deputy chairman and long-time corporate adviser and dealmaker Liam Twigger says the “tide has turned on Chinese investment”.

He suggests that some Chinese investors are worried about putting more money into Australia in today’s charged political environment for fear of the investments being targeted in any crackdown on national security grounds.

“In a climate of high political tensions, they believe there’s a risk these assets get locked up,” Mr Twigger said. “They are very sensitive to that.”

However, Dr Hendrischke believes the environment, while chilly, may not be as bad as some think. He noted that Mr Xiao said “what he had to say” about Taiwan and that China had promoted a One China policy for 40 years.

He said the signals from Beijing indicated the country did want an improvement in relations. And there were Chinese companies already in Australia hopeful an improvement would enable them to resume their investment plans.

“There’s quite a few companies running businesses here who were thinking of expanding and increasing their exposure to Australia,” Dr Hendrischke said. “But they’ve been held back for largely political reasons.”

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